Buy into reliable Renew

After stripping out acquisition-related growth and non-recurring revenue in 2016, the core engineering services business (83 per cent of group revenue and 90 per cent of profit) increased its organic sales by 3 per cent during the 12 months to the end of September. These results were ahead of market consensus expectations.

The business's largest client is Network Rail, to which it is operating as sole supplier to seven rail infrastructure frameworks.

It is also a supplier of repair and maintenance services to water companies including Welsh Water and Wessex Water. Last year Renew was appointed to the Civils and EMI Delivery Partners framework, estimated to be worth £350m to 2020. Income here should continue to pick up as the AMP6 regulatory period - which runs until 2020 - steps up a gear. Admittedly, there has been some weakness in the gas replacement market during the past year. However, management is now focusing on higher-margin areas of the market. Nevertheless, work on long-term spending programmes helps provide a stable income stream. The engineering services division increased its order book by 5 per cent to £421m in 2016. The group built on this during the first quarter, growing the order book for this business to £431m.

However, there are growth opportunities from acquisitions, too. In November, the group acquired former client Giffen, a specialist in mechanical, electrical and power services to railways, for £5m. This business has four frameworks with Network Rail and six with London Underground. Management hopes this will pave the way for the group as a whole to gain more civil engineering work with London Underground. Following this purchase, analysts at Numis upgraded their pre-tax profit and EPS forecasts by 4 per cent for 2017. Management has signalled its intention to make further bolt-on acquisitions. The group has the means to do so, with a net cash balance of almost £5m.

In 2012, management set targets for sales in excess of £500m and an operating profit margin of at least 4.5 per cent by 2017. The group beat its sales target two years ahead of schedule and is on track to achieve its targeted operating profit margin this year. In 2016, this margin was 4.2 per cent.